Junk jumps as stocks soar on Fannie-Freddie takeover; GMAC motors higher; Clear Channel shrinks

By Paul Deckelman and Paul A. Harris

New York, Sept. 8 - High yield issues were seen better pretty much across the board on Monday, traders said, as the junk bond market took its cue from a stock market surge triggered by the federal government's official bailout - essentially, a takeover - of troubled mortgage giants Fannie Mae and Freddie Mac.

Mirroring the behaviors of the equity market and investment-grade bonds, big winners in junk were especially prevalent among the financial-related issues, such as struggling automotive and mortgage financier GMAC LLC, as well as the latter's wholly-owned Residential Capital LLC mortgage unit.

Elsewhere, United Rentals Inc.'s paper was better in active trading on the news that the Greenwich, Conn.-based equipment rental company had agreed to settle fraud allegations brought against the company by the Securities and Exchange Commission.

In the primary arena, price talk emerged on the upcoming offering of eight-year notes which Clear Channel Communications Inc. will sell to help pay off some of the cost of the giant San Antonio-based radio station owner's recent leveraged buyout transaction.

Still, while market sources marked junk higher on Monday, following the much remarked-upon U.S. government bailout of deeply troubled mortgage firms Fannie Mae and Freddie Mac, enthusiasm and optimism remained in short supply.

"We're up a quarter of a point but we're underperforming stocks," one syndicate source said, referring to a rally that sent the Dow Jones Industrial Average up nearly 2.6% on the day.

Meanwhile a trader from a high-yield mutual fund said that the broad market was up ¼ to ½ point, with no cash bonds trading.

"Home builders is the strong area," the trader said, adding that there had also been a lot of short covering.

Meanwhile news in the primary market remained in short supply

Clear Channel slashed

Clear Channel Communications Inc. slashed the amount of LBO-related notes that it plans to sell to $325 million from $980 million, informed sources said on Monday.

Price talk on the 10¾% senior cash-pay notes due 2016 (Caa1/CCC+) is 71.00 to 72.00.

One sell-side source, not in the deal, calculated that the resulting yield would range from 17.4% to 17.7%.

The books are expected to close on Tuesday afternoon.

Meanwhile a buy-side source said that the resale of the notes, which underwriters initially priced at par on Aug. 1, is apparently not going as well as some of the participants had anticipated.

Initially, the buy-sider said, the underwriters made a unified approach to the market with the $980 million of 10¾% cash-pay notes.

However, as levels on the re-sale pricing materialized, holders of the majority of the notes backed away, the source added, noting that an eventual improvement in the capital markets might obviate the need to discount the securities by 28% to 29%.

Deutsche Bank Securities, Morgan Stanley, Citigroup, Credit Suisse, RBS Greenwich Capital and Wachovia are the underwriters.

Frontier Oil ready for lunch

Meanwhile investor lunches were set for Wednesday in New York and Thursday in Boston for Frontier Oil Corp.'s $200 million offering of eight-year senior notes - a deal that launched late last week.

UBS Investment Bank is the bookrunner for the general corporate purposes deal from the Houston-headquartered independent oil refiner.

Also on Monday Standard & Poor's assigned its BB rating to Frontier Oil's notes.

Faint praise for Fannie/Freddie bailout

High-yield market sources who spoke to Prospect News on Monday, trailing the weekend news that the U.S. government will intervene to rescue Fannie Mae and Freddie Mac, failed to see the bailout of the deeply trouble mortgage giants translating into any kind of sustained positive news for the junk market.

When Prospect News pointed to the surging Dow, one syndicate official replied that the market could easily be down 300 points on Tuesday.

"You have the government out there taking actions not seen since FDR was president," the banker said, referring to President Franklin D. Roosevelt's "New Deal" agenda of the 1930s and 1940s.

"I don't know if the market is supposed to rally 300 points on something like that," the official added.

The source believes that the Fannie/Freddie news will ultimately not impact high yield.

As other sell-siders said during the run-up to the Labor Day break, and since, this banker sees a pipeline of potential corporate issuance that could come to market, should the opportunity arise.

However, the source added, "It's a little bit of a Catch 22: nobody wants to be the first one out there to reopen the market."

The sell-sider reckons that an issuer contemplating raising cash in the junk market is presently facing a new issue premium of between 50 and 75 basis points.

Elsewhere a hedge fund manager proved no more sanguine regarding the implications of the Fannie/Freddie bailout for high-yield.

Meanwhile a trader from a high-yield mutual fund counseled that time spent parsing the implications of the bailout for the junk market would likely not be time well spent.

"The next thing high-yield is going to have to deal with is the default rate," the trader said.

"That's the big gorilla in front of us.

"It may take some time, but it's going to go up, and you're going to see a lot more extortionary exchanges, and so forth."

This source said that the rumor of the day is that General Motors Corp. is contemplating a bond exchange in order to address its shorter term debt.

Market indicators seen better

The widely followed CDX index of junk bond performance was up ¼ point, said a trader who quoted it at 93½ bid, 94 offered. The KDP High Yield Daily Index meantime zoomed 44 basis points to end at 70.81, while its yield 11bps tighter at 10.54%.

In the broader market, advancing issues led decliners by a five-to-three margin. Activity, represented by dollar volume, was down 2% from the levels seen on Friday.

A trader said that "there was definitely a positive, bullish tone today, no question about it." He guesstimated that "about 90% of the activity was on the upside."

That having been said, however, he added that "I think it was more offerings being jacked versus bids being lifted." He said that while "bid sides were definitely higher than where we were last week, but fractionally, while offer sides were jacked anywhere from one to two points."

He also noted that "a majority of the activity was dealer-driven, as far as re-adjusting positions in their books, versus, accounts, or the buyside actually jumping in, full-fledged. But there certainly was increased activity, although he added that in many credits, "there seemed to be a pattern - activity was up, but not prices."

Another trader said that "starting out the day, GMAC paper was up, with the short-end paper up probably a point, a point-and-a-half. Then it seemed that the larger-cap names were kind of active, like Charter [Communications Inc.] and Sprint [Nextel Corp.], probably the two most active names out there."

He said that while at the beginning of the day "it was kind of very focused on a few names, and a lot of guys were watching to see whether the stock market would follow through" on the positive Fannie-Freddie news, as the day wore on, "it was more like a Monday than I thought it would be after the news this morning."

He explained that "generally, the market's better - but I'm just not seeing all of the follow-through that you would have expected to see."

However, he noted that "it looks like cash has been flowing into the marketplace, at least in the mutual fund space," and predicted that "you've got a little calendar coming this week, maybe that will take some of that cash out of the marketplace, and maybe some other stuff will trade," although he added, "I'm not sure."

GMAC, other financials gain

Financial names seemed to be the most obvious gainers from the sector strength that followed in the wake of the Fannie-Freddie news.

A trader saw GMAC's 8% bonds due 2031 some 1½ points higher at 55.5. Yet another saw the 8s up nearly 2 points at 56.5 bid on active dealings of $10 million. He GMAC's 5 5/8% notes coming due next May at 92 bid, up 1 3/8 point on the day in "fairly active" dealings of about $7 million.

A market source at another desk said that GMAC long bonds were among the most actively traded issues on the day, pegging them up 2½ points on the session at 56.5 bid, while GMAC's 6 7/8% notes due 2011 were also up 2½ points, in similarly busy trading, at 64.5 bid.

A trader saw GMAC's problem-plagued mortgage unit, ResCap's 6½% notes due 2013 a point better at 25 bid. Another trader saw those notes at 26.125 bid, up from 24.75 on Friday.

And a trader saw bond insurer MBIA Inc.'s investment grade-rated - but junk-traded 14% surplus notes due 2033 some 2 points better at 88.5 bid.

One financial name which did not benefit from the general sector euphoria was Washington Mutual Inc., whose shares fell sharply on news that the problem-plagued Seattle-based thrift had unceremoniously shown its chief executive officer, Kerry Killinger, the door. It had also promised regulators that it would cut its risk and provide them with a detailed road map of its turnaround efforts.

A trader saw WaMu's split-rated 8¼% notes due 2010 trading at 61 bid, down 5 points from Friday's closing levels, though "only odd-lots were trading." He called the bonds 2 points lower than Friday's final round-lot trade of 63 bid.

United Rentals up on SEC settlement

A trader said that United Rentals' 7¾% notes due 2013 rose to 80.5 bid in round-lot trading from 78.5 bid Friday, and noted that volume "out of the blue" jumped to about $10 million from about $1 million the previous session.

He also saw its 6½% notes due 2012 better by ½ point at 89.5 bid, on $5 million of bonds traded.

Another trader saw the 73/4s up a point at 80, squarely attributing the rise to news of the SEC settlement.

The SEC had investigated the equipment rental company for fraud, claiming United Rentals engaged in fraudulent activities in an effort to meet earnings and analyst expectations. While the company neither confirmed nor denied the claims, it opted to pay $14 million to settle the case.

Charter bonds actively traded

A trader saw Charter Communications' 11% notes due 2015 actively traded but little changed price-wise at 76.5 bid, 77 offered.

Another trader saw the bonds open at 77 but finish not much changed from Friday's 75.75 bid, 76 offered.

Yet another trader, though, looking only at round-lot dealings as meaningful, saw the St. Louis- based cable television operator's bonds at 77.25 bid late in the session, well up from 75.75 on Friday, "on impressive volume" of some $25 million.

Six Flags still flying

The trader also saw continued firmness in Six Flags Inc.'s 9 5/8% notes due 2014, which he quoted up 1¼ point on the session at 63.25 bid.

The New York-based them park operator's bonds had firmed last week on investor expectations that the company's final third-quarter numbers due out in a couple of weeks will show a continuation of the strong attendance and revenue trends seen over the first six weeks of the quarter, as the company tries to meet its goal of being cash-flow positive for the first time ever.

Stephanie N. Rotondo contributed to this report

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